Are There Any Other Types of Annuities?
You didn’t just think that there were only immediate and deferred annuities did you? Within each, there are fixed and variable categories. While this was briefly discussed in the section above, let’s dig a little deeper.
Fixed vs. variable annuities
A fixed annuity, according to the Insurance Information Institute, is when “the insurance company guarantees the principal and a minimum rate of interest.” To put that in layman’s terms, “as long as the insurance company is financially sound, the money you have in a fixed annuity will grow and will not drop in value.”
“The growth of the annuity’s value and/or the benefits paid may be fixed at a dollar amount or by an interest rate, or they may grow by a specified formula,” adds the III. “The growth of the annuity’s value and/or the benefits paid does not depend directly or entirely on the performance of the investments the insurance company makes to support the annuity.”
There are some fixed annuities “credit higher interest rate than the minimum, via a policy dividend that may be declared by the company’s board of directors.” But, this will only occur “if the company’s actual investment, expense and mortality experience is more favorable than was expected.”
And, it should be known that fixed annuities are regulated by your state’s insurance departments.
What else should I know about fixed and variable annuities?
If you have money placed in a variable annuity, then it’s actually invested into a fund, like a mutual fund. The thing is, it’s only to investors who happen to be “in the insurance company’s variable life insurance and variable annuities,” explains the III. “The fund has a particular investment objective, and the value of your money in a variable annuity—and the amount of money to be paid out to you—is determined by the investment performance (net of expenses) of that fund.”
A majority of “variable annuities are structured to offer investors many different fund alternatives.” And, just like fixed annuities, variable annuities are regulated by state insurance departments. But, they’re also kept in check by the federal Securities and Exchange Commission.
Types of fixed annuities.
Did you also know that there are a couple of different types of fixed annuities? If not, consider you’re newly informed.
The first is an equity-indexed annuity. It’s a fixed annuity that at first appears to be a hybrid. “It credits a minimum rate of interest, just as a fixed annuity does, but its value is also based on the performance of a specified stock index—usually computed as a fraction of that index’s total return,” clarifies the III.
The second type is what’s known as a market-value-adjusted annuity. It “combines two desirable features—the ability to select and fix the time period and interest rate over which your annuity will grow, and the flexibility to withdraw money from the annuity before the end of the time period selected,” states the III. If you want to withdraw, this type offers more flexibility. The reason is that it adjusts “the annuity’s value, up or down, to reflect the change in the interest rate ‘market’ (that is, the general level of interest rates) from the start of the selected time period to the time of withdrawal.”
But, wait, there’s more…
If you recall, there were deferred and immediate annuities. But, there are also the following types of annuities — which are available in fixed or variable forms.
Lifetime vs. fixed period annuities
With a fixed period annuity will receive an income within a specified period of time, like five or ten years. What’s great about this type is how much that is paid out doesn’t depend on your age. Instead, payments are dependent “on the amount paid into the annuity, the length of the payout period, and (if it’s a fixed annuity) an interest rate that the insurance company believes it can support for the length of the pay-out period.”
A lifetime annuity, as you might assume, provides income for the remainder of your life. As the III adds, there’s also a variation of lifetime annuities that will continue “income until the second one of two annuitants dies. No other type of financial product can promise to do this.” How much will you get paid? That does depend on your age, “the amount paid into the annuity, and (if it’s a fixed annuity) an interest rate that the insurance company believes it can support for the length of the expected pay-out period.”
There’s also something known as a “pure” lifetime annuity. It’s a lifetime annuity with the caveat that payments cease when the annuitant dies — regardless if not much time has passed since they began. Suffice to say, a lot of annuity buyers are uncomfortable with this possibility.
To put them a little more at ease, they add a guaranteed period. It’s pretty much a fixed period annuity that’s in addition to their lifetime annuity. That means when you have this combination, and you pass away “before the fixed period ends, the income continues to your beneficiaries until the end of that period.”
Qualified vs. non-qualified annuities
Do want an annuity that can be invested and dispersed into a tax-favored retirement, like an IRA? You’re in luck thanks to a qualified annuity. With this type of annuity, the premiums or contributions that you make towards an IRA or Keogh plan or plans governed by Internal Revenue Code sections, 401(k), 403(b), or 457, are not classified as taxable income for the year that it was paid. “All other tax provisions that apply to non-qualified annuities also apply to qualified annuities,” adds the III.
Since there’s a qualified annuity, then there has to be a non-qualified annuity as well. After all, you can’t have yin without yang. With this type, it would be purchased separately from, or “outside of,” a tax-favored retirement plan. “Investment earnings of all annuities, qualified and non-qualified, are tax-deferred until they are withdrawn; at that point, they are treated as taxable income (regardless of whether they came from selling capital at a gain or from dividends).,” explains the III
Single premium vs. flexible premium annuities
Still hungry for more annuities? Hope you have an appetite because we have a couple more to go over.
A single premium annuity is an annuity funded by, well, a single payment. You can then invest the payment for the long haul with a single premium deferred annuity. Or, it can be “invested for a short time, after which payout begins—a single premium immediate annuity,” states the III. “Single premium annuities are often funded by rollovers or from the sale of an appreciated asset.”
On the flip side, there’s a flexible premium annuity. It’s “an annuity that is intended to be funded by a series of payments,” explains the III. “Flexible premium annuities are only deferred annuities; that is, they are designed to have a significant period of payments into the annuity plus investment growth before any money is withdrawn from them.”